Stockholders' Equity (aka Shareholders' Equity or Owners' Equity)

Stockholders' equity represents the owners' investment in the business (i.e., the owners' claim on assets). The term owner’s equity (OE) applies to all the business formats (sole proprietorship, partnership, and corporation), but the term stockholders' equity refers only to the owners of corporations, because those who own shares of stock in a corporation are the owners of that corporation.

Stockholders' equity has the following components:

• capital stock or common stock: If the business issues shares of stock (i.e., ownership) to investors in exchange for $100,000, the $100,000 that has to be paid by the investors to purchase the stock is called capital (or common) stock. Capital stock is recorded at the initial selling price of the stock, and there are no adjustments for increases and decreases in market value.
• retained earnings: This represents earnings reinvested in the business rather than distributed to owners as dividends. For example, if the business makes $120,000 profit and distributes $40,000 of this to owners as dividends, retained earnings (owners' equity) in the business would go up by $80,000.
• dividends: Dividends are distributions of cash or other assets to the stockholders. Note that dividends do not appear on the balance sheet. They are closed to retained earnings before the balance sheet is prepared (explained in Lesson 4).

The following are also included in stockholders’ equity in Lesson 1:

• revenue: Revenue is the amount earned from delivering services or goods to customers. Revenue is initially included in equity.
  Examples include
  • fees earned,
  • service revenue,
  • commissions earned, and
  • sales revenue (explained in Lesson 5).
• expenses: An expense is a normal cost incurred in the selling of goods or services.
  Examples include
  • wages expense,
  • utilities expense, and
  • advertising expense.